Disney vs Netflix: A New Great War

Netflix is no longer the new kid on the block, and Disney is no longer the undefeatable empire they once were. And Disney by acquiring Fox and announcing they will be removing all of their Disney content off of Netflix, have made things perfectly clear.

This is a declaration of war, a war for the attention, and paid subscriptions of the general public. And your phone, computer, tablet or whatever streaming device you use is the battlefield.

What makes this “war” so fascinating is that both Disney and Netflix have significant advantages in their own right. This is one of those classic business battles that I’m confident in 10 to 20 years from now business books, professors, and thought leaders will look back to and reflect on. This is the new Nike vs Adidas of the 80s. Disney is Adidas, the older giant who has been dominating for a very long time, and Netflix is Nike, the up and comer who has been having massive success to the point where they can now challenge the incumbent. An archetypal “your idols become your rivals” moment, when you’ve become the very person or company that you once looked to as an example of excellence.

But we are here to learn, and everyone in business can learn from what’s going to happen, no matter who wins. Let’s dive deep shall we?

First, let’s talk the advantages that each company has. Let’s start with Netflix.

Netflix’s Advantages:

• They have all the momentum, an ever-strengthening brand, and the world’s largest growing paid subscriber base. Last year passing over 110 million paying subscribers.
• They are bringing in huge amounts of revenue, coupled with tremendous growth. Which has led to a near infinite amount of capital raised from investors and a line out the door of banks offering them loans with low interest. They’re rolling in dough.
• They use this excess cash VERY effectively. Much of it is going to fund Netflix Originals, which if you look at the typical Netflix home screen now vs. 5 years ago is a major difference.

Netflix’s home page in 2013 (left) was comprised mostly of third party content as opposed to now (right).

Using Their Advantages to Forge a New Business Model

Before, Netflix was a distributor who gained customers because they made it easy to access content so that people wouldn’t have to rent a DVD or wait for it to be in stock at the store. They just gave you a download. Customers paid for Netflix, so they could watch all the things they could already watch via other methods, but in a more convenient way. Now, people pay for Netflix, yes still partly for their 3rd party selection, but mostly for Netflix’s original content. Distribution is a commodity; intellectual property is an asset. Anyone with enough capital resources can create a streaming service and pay a royalty to studios for streaming their movies or shows. But only Netflix can stream Netflix Originals, that’s why they care so much about promoting them. But before we go further into what Netflix wants to accomplish, let’s talk about the advantages that Disney has.

Disney’s Advantages:

• Just like Netflix, as you might imagine, Disney is a massive corporation and doesn’t have an issue when it comes to funding. That’s why they’re able to make multi-billion-dollar acquisitions left and right.
• The biggest asset that Disney has is its massive library of intellectual property (IP). In fact, 14 of the top most streamed shows on Netflix last year were owned by either Disney or Fox. Disney now owns Fox, so Netflix can say sayonara to 14 of their top shows.
• But perhaps the biggest advantage Disney has is Hulu. Hulu is nothing but an ant on the picnic blanket trying to steal crumbs when compared to Netflix. But that might not be the case anymore. See Hulu was a joint venture started by NBC Universal who brought in Disney and Fox as partners. NBCUniversal owned 30%. Disney & Fox 30% each. So now Disney controls Hulu. Despite being much smaller than Netflix, Hulu is still the #4 streaming company by # of subscribers (Netflix, HBO, and Amazon being 1, 2, 3). But Hulu could soon be the ONLY platform where you could stream all Disney, Fox, & NBCUniversal content. Those are 3 of the top 4 media companies in the world. And who’s the other company that completes the top 4? TimeWarner, who happens to own the other 10% of Hulu. All this goes to say that Disney now controls a large streaming platform that has the rights to the licensing of content of the world’s 4 largest content companies. That’s what I call an advantage.

We’ve got this massive growth new guy, Netflix, facing up against the wise old emperor in Disney. The goal of Netflix is really to become like Disney. They want to create as much intellectual property and unique content as they can because it’s a massive asset that they can fully control. Disney on the other hand has a ridiculous amount of IP. They own all Disney characters (obviously), they own Marvel, they own Star Wars, they own Pixar, and they now own the Simpsons, all of the Seth McFarlane’s adult cartoons like Family Guy, American Dad, etc. and much more from Fox’s library. Most people are a fan of at least one or many of those properties. They also own ESPN which has rights to the NBA, MLB, and now with Fox they own the European sports powerhouse, Sky Sports.

Once this acquisition goes through, Disney’s main goal will not be to grow their IP. Of course, they will still continue to do that, but they’ve been doing that for 70 years and it’s not where their weakness lies. They want to increase their distribution and cut out the middle man that is cable companies. It’s a win-win for them, they make more money without giving a cut to anyone else, and it’s a better customer experience because they can watch all the Disney properties they want directly from the source, from the company who makes it.

This is where the battlefield is. Disney and Netflix are fighting each other because both want subscription growth, and both have a lot of content to offer. We’ll have to wait and see who wins. Disney has yet to launch a true streaming service, but it will likely be here by the end this year or early 2019 at the latest. Until then it’s a mad dash for Netflix to grow and create as many Originals as they can to ensure their customers realize that they’ll be missing out if they don’t have a Netflix subscription.

In reality, it’s not a zero-sum game. It won’t be a story in which one company wins and the other goes out of business. The real truth is that they both have huge growth opportunities because people are cutting the cord in droves, and there are millions more who are chomping at the bit to do so as well but don’t have quite enough streaming options yet to justify it. But by 2020, once Disney’s streaming service is set up, Netflix with double the Originals they have now, and services like YouTube TV growing their selection, we will see a mass exodus of cable & satellite subscriptions. Which means the money might not be coming out of Disney or Netflix’s pocket when they grow, the money will be coming out of the revenue streams of the massive cable providers like Comcast, Charter, Cox, etc. But then again don’t worry about them too much, after all Comcast owns NBCUniversal, so their streaming success could easily make up for their money lost from cord cutters.

The beauty is that these behemoths had all the money and resources in the world to squash Netflix years ago, but they didn’t. They focused on maintaining their monopolies, looked only at short term profits, and failed to realize that when you treat your customers poorly that you will always pay for it in the end. And now those once sleeping giants just five or six years ago are raising their armies and sharpening their swords, because the media world is now at war. It will be bloody, and painful for many of said giants, but it’s their own damn fault. And we can all sit gladly by, enjoying the carnage.

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